Gina Rinehart’s lithium love affair faces Liontown acid test

Liontown is the poster child for lithium’s price plunge, and the news is getting worse. Could billionaire Gina Rinehart, the firm’s biggest shareholder, ride to the rescue?

Jan 22, 2024 – 2.02pm

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Gina Rinehart’s name wasn’t mentioned on Liontown Resources’ investor call on Monday morning, during which CEO Tony Ottaviano revealed the $760 million debt deal package he stitched up last year to build the company’s Kathleen Valley lithium mine has fallen over due to the plunging lithium price.

But the shadow of Australia’s richest business person, and Liontown’s biggest shareholder, hangs heavy over the company’s next move.

Gina Rinehart looms as the kingmaker as Liontown scrambles for a new debt deal. David Rowe

While Liontown insists that the outlook is not nearly as bad as the 90 per cent fall in the lithium price suggests, price triggers in its funding package means Ottaviano must now recut and shrink the debt deal.

And that also means Liontown will need to drastically scale back its ambitions at Kathleen Valley: the 3 million-tonne-per-year mine set to start production this year will go ahead, but the development work for the mine’s eventual 4 million-tonne-per-year underground expansion will be put on ice.

But as Ottaviano was asked repeatedly on Monday, could Liontown seek alternative funding from one of its strategic shareholders? Halting the underground expansion will destroy a lot of value for shareholders. Could Rinehart, who owns a 19.9 per cent stake and has more than $20 billion on her balance sheet, make Liontown’s debt problems go away?

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Ottaviano will talk to shareholders, and says he would look at any alternative to bank debt. Ever the optimist, he’s also wary that Liontown could be caught short if the lithium market suddenly turns and the demand picture Liontown shines through again, sending prices north.

But for now he has little choice but to start the painful process of scaling back Liontown’s ambitious dreams amid the lithium sector’s stunning rout. And sadly, Liontown is arguably the poster child for this price plunge.

Funding tied to price forecast

On October 15, the company was sitting on a $6.6 billion takeover offer from US lithium giant Albermale. But Liontown’s suitor abandoned its bid the following day and just 14 weeks down the track, Liontown is worth just $2.2 billion. The stock crashed another 21 per cent on Monday to 94¢.

With hindsight, it would appear Albermale’s decision to walk had much to do with the looming lithium price crash. But at the time it was blamed largely on the intervention of Rinehart, whose investment vehicle Hancock Prospecting spent $1.3 billion (at $3 a share) to build what was effectively a blocking stake in Liontown, one of several stakes in lithium and critical minerals juniors it took stakes in last year.

Following the collapse of the Albermale offer, Ottaviano did an impressive job to scramble and stitch together a $1.1 billion funding package, including an equity raising and that $760 million debt deal.

At the time, Ottaviano hailed the calibre of banks he’d convinced to secure the deal – ANZ, CBA, HSBC, NAB, Westpac and Société Générale lined up, plus support from the Clean Energy Finance Corporation and a commitment from Export Finance Australia.

But what emerged on Monday was that those banks and finance providers demanded the comfort of a price projection from independent forecaster Wood Mackenzie built into the deal.

Tony Ottaviano says the lithium slump is cyclical. Trevor Collens

While Liontown has got on with building Kathleen Valley, finalisation of the debt package has continued. But in recent days, WoodMac has updated its lithium price projection – at a point 60 per cent lower than in October last year.

Again, the Liontown house view is that WoodMac and other forecasters are too bearish on the lithium price outlook. But Ottaviano had to accept an independent forecast to get the deal over the line, and so he’s tied to the WoodMac projections.

And you can’t really blame WoodMac for any bearishness. As Ottaviano said on Monday, the spodumene price has slumped from $US7000 a tonne to spot price in the order of just $US875 a tonne, which is even lower than some observers have suggested in recent weeks.

Of the $760 million debt package Liontown secured last year, $300 million was provided some years ago by carmaker Ford. So the package that Ottaviano is now trying to recut is actually $460 million.

Liontown has $515 million in cash on its balance sheet, which will be enough to get Kathleen Valley into production. But the company would like to have $150 million in cash to support it through the ramp up phase – particularly given the price backdrop means that the cash profitability mine won’t be nearly as clear as it would have been three months ago.

Ottaviano insists his banking syndicate remain committed and supportive, and that he can secure a new, smaller deal. Although as analyst Glyn Lawcock of Barrenjoey, exactly how supportive the banking syndicate is given the fact they haven’t exactly raced to put a new deal in place for Liontown is an open question.

Having a new debt package – even a smaller, more expensive one – may have limited Monday’s sharemarket rout.

‘Just one of those cycles’

Given he’s about to enter potentially tricky negotiations with his banks, Ottaviano wasn’t about to start criticising them on Monday. Instead, he tried to reassure investors as best he could that the Litontown story – and indeed, the lithium story – remains intact, this price pain won’t last and the miner needs to keep thinking big.

“We all have experience in the commodity cycle, right? And what we’re experiencing now is just one of those cycles,” Ottaviano said.

“I don’t want to be flat-footed when the market turns, so there’s a judgement call that we’ll make as a board and as an executive around what levers we pull. Because I’ve been in this game a long time, and I could see when the market turns, the market will turn strongly…There’s always these overcorrections and potentially we’re seeing an overcorrection now – that’s why there is no change to the base case.”

Sounds like exactly the sort of pitch he might make to convince Rinehart to play rescuer. But any deal with the billionaire brings its own questions.

For Liontown, the question is what trade-offs would be involved in a deal struck in the company’s hour of need? Financing, whether in the form of debt or equity, would surely come with greater influence for Hancock Prospecting over Liontown’s strategic direction.

Rinehart’s stake down 70pc

Rinehart could not make a takeover bid under $3 a share until February 11, but from then is game on. But the big question for the billionaire is how committed she is to lithium as a commodity, and to Liontown as a company.

If she is a long-term believer in lithium’s demand outlook, and Kathleen Valley’s quality as a project, then this is arguably a perfect time to put money to work. As Ottaviano said on Monday, it seems unlikely lithium prices can continue to sink given we are now reaching the sort of price levels where even the economics of even the best projects are starting to be challenged.

Alternatively, Rinehart may feel more than a little singed by her Liontown experience. In the space of about 100 days, the value of her stake has fallen 70 per cent, and there seems little end to the bad news coming out of the sector.

Indeed, last week ended with Ford – Liontown’s financial backer – cutting prices further for its electric F150 Lightning truck. Ford, GM and Tesla have scaled back electric vehicle expansion plans and EV makers around the world are cutting prices to stimulate demand, prompting a warning from Carlos Tavares, the CEO of Stellantis, which makes Jeep and RAM.

“If you go and cut pricing disregarding the reality of cost, it’s a race to the bottom and that will end up with a bloodbath,” he told the Financial Times.

Therein lies the challenge. The hugely bullish EV demand story is the bedrock on which the lithium sector’s hype machine has been built, but it’s running out of puff at exactly the wrong time.

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